Here Group Limited ($HERE)

Good morning and good evening, ladies and gentlemen. Thank you for standing by, and welcome to Here's Earnings Conference Call. [Operator Instructions] Please note that today's event is being recorded. I will now turn the conference over to Ms. Tina Tang, the company's Manager of Investor Relations. Please go ahead, ma'am.

Thank you. Hello, everyone, and welcome to Here's Earnings Call for Third Quarter of Fiscal Year 2026. With us today are Mr. Peng Li, our Founder, Chairman and CEO, and Mr. Tim Xie, our CFO. Mr. Li will provide a business overview for the quarter, then Tim will discuss the financials in more detail. Following their prepared remarks, Mr. Li and Tim will be available for the Q&A session. I will translate for Mr. Li. You can refer to our quarterly financial results on our IR website at ir.heregroup.com. You can also access a replay of this call on our IR website when it becomes available a few hours after its conclusion. Before we continue, I would like to refer you to our safe harbor statement in our earnings press release, which also applies to this call. As we will be making forward-looking statements, please note that all numbers stated in the following management's prepared remarks are in RMB terms, and we will discuss non-GAAP measures today, which are more thoroughly explained and reconciled to the most comparable measures reported in our earnings release and filings with the SEC. I will now turn the call over to the CEO and Founder of Here, Mr. Li.

Okay. Thank you. Good morning, everyone, and thank you for joining us today. I'm very pleased to announce that we achieved about RMB 165 million in revenue this quarter. This exceeded the high end of our guidance. More importantly, we keep improving our IP and pop toy business. We are consistently optimizing our operations and cost structure to build a stronger foundation for long-term growth. As we all know, the first half of the year, especially the first 3 months is typically a slow season for the pop toy industry. We are working with our channel partners and selling through our own direct channels. We stayed focused on our core strategy. That means building internal capabilities, developing IP-related products and content and optimizing our channels. The market environment remains challenging, but consumers' demand for emotional and experience-based spending [indiscernible]. We build our IP products and services around what consumers actually needs. Let me start with our IP performance. WAKUKU remains our flagship IP. It contributed RMB 102 million in revenue in Q3. All around 62.2% of total revenue. SIINONO's revenue grew 73.1% quarter-over-quarter, accounting for 20.2% of total revenue. SIINONO launched in the second half of 2025. In less than 1 year, it has reached a meaningful scale. This is an early validation of our ability to use new IPs. More importantly, we are seeing growing across key engagements. WAKUKU users are connecting with SIINONO and other IPs, while new users are always discovering our increasingly reach [indiscernible] IP portfolio. As we move forward, we keep coming back to 1 key insights, short-term sales are not the real measure of success. The real question is whether an IP can win users and earn lasting place in their heart and lives. IP development and ongoing operations take time. They require long-term interaction between the IP and its users. Open in the physical spaces, off-line D2D stores are a key part of making that happen. Based on our deeper knowledge of the IT industry, we have refined our strategy. In 2025, our growth was mainly driven by our strong product capabilities and the strength of our IP portfolio. At the same time, we benefited from favorable market circles, channel tailwinds and celebrity partnerships. These collaborations give us additional momentum and valuable experience. We will continue to benefit from our partnerships at the same time. We know that building lasting IPs requires strong building and solid operational capabilities. That means building our own systems to reach users directly and engage with them deeply. Therefore, long-term IP momentum will always be our top priority. Revenue should follow from strong IPs not business target. To achieve this, we have set the following key priorities: First, keep building IPs on ground operations, create ongoing interaction between IPs and users through different formats, deliver great emotional experiences. We will stick to our strategy, focusing on our core IPs while creating and growing new ones. Around our core IPs, we are speeding up the development of innovative products. This will take about 3 to 6 months. We expect to launch new products from our core IPs very soon. Second, keep expanding our offline B2C shops and the roboshops. This explains our brand reach and user touch points. We treat our offline D2C stores as an expansion of our IP products. The store itself is a product. It unifies the IPs within our self-operated strong system. As of today, we have opened 7 B2C brown stores. IP serves as a space for -- from the user interaction. Our membership system has also been upgraded. We now have a full train membership management system in place. This lays the foundation for constant user engagements. Our roboshops shop [indiscernible] has also recently began. To date, we have devoted around 15 roboshops in 3 cities. Third, keep building strong online operations. We want to note that online sales are not our goal. Online activities will serve as one of the choice for IP and product operations. This helped us deliver a great consumer experience costs, keep a measured on the steady pace on global expansion. In the near term, we plan to open a pop-up store in South Korea and participate in a trade shop in the U.S. at the initial market test. Fifth, keep optimizing our business cooperation with channel partners we pursue mutual benefits on the winning outcomes. We work with them to promote our IPs and products and to deliver great experiences to users. Building IP value and enhancing user experience is a long journey, but with efficient execution, we can move more steadily, better and faster. Our progress comes down to 2 things. First, IP ecosystem. We are moving from one-off hit to repeated engine. As of March 31, 2026, our IP portfolio includes 20 total IP. That includes [indiscernible], and 8 exclusive [indiscernible]. This quarter, we focused on diversifying our [indiscernible] metrics. We introduced [indiscernible] with unique sales and different target audiences. We also accelerated our new product launch pace for both flagship and emerging IPs. This quarter, we launched a new co-branded IP, [indiscernible]. Its cost purity is defined by [indiscernible] and free. This message resonates well with young consumers to drive the launch with an integrated campaign across celebrity, social and fun channels, leveraging our strengths in IP design, supply chain and omnichannel sales. We completed prelaunched, including character development and mass production. So strong market attention and the prelaunch. The slow market response has validated and strengthened our portfolio. It proves that our IP incubation model is scalable and competitive. Beyond [indiscernible], we have a strong product pipeline in preparation. We will launch the study according to our planned content patents. WAKUKU, we launched a new series, the handicraft world of WAKUKU series, [indiscernible] on March 28 as of March 31. The initial launch period, the series achieved strong results. Total omnichannel sales exceeded RMB 20 million. Peak concurrent online viewer reached 28,000. And the total new product expose topped [ $100 million ]. The series focuses on handicraft field, [indiscernible] healing labs. This depends on our emotional connection with the users in. We also released the file to [indiscernible] gift box. WAKUKU [indiscernible] as a handicraft card steps. Recently, we have also launched a new product for other IPs. This includes new pop toys, renal figures, funding costs and the semis collections for IPs, like ZIYULI, SIINONO, PIDOL, KILIKILI and AWHY. Each of these IPs speaks to a different audience with unique styles and the label. That's how we build a richer IP metrics. For SIINONO, the new generation product Mood On series, indi, off-line launch on May 30 and online launch on June 2. Second, omnichannel reach, we are boosting IP user interaction with a clear focus, off-line first, online empowering. Offline, we operate through 3 channels: our D2D stores, roboshops network and partner channels. First, our self-operated brand stores and roboshops. As of today, we have opened 7 D2C stores in 4 cities. We recently opened 2 new D2C stores. One at Shenzhen Uniwalk Qianhai, April 25. And another at Xi’an SAGA on May 1. Both stores in prime high traffic business areas, and that's among the biggest in their respective cities. We are closely tracking store performance and scouting locations for new stores. We are also expanding into automatic retail. As of June 1, we have rolled out about 15 roboshops across key cities nationwide. This unmanned vending machines placed in high-traffic locations. They extend our off-line reach without the higher cost of full-scale stores. They serve as both sales channels and brand touch points. They make our IP more successful with collection neglecting available data on product performance and purchasing types. Second, partner channels. We continue to work with our channel customers. These partnerships helped us reach more consumers through established retail network. The expense of our IPs and brand elements have more off-line touch points and help us interact with users. On the online side, our social media presence continues to grow. As of June 1, our commutative followers across major platforms is approaching 800,000. We use online channels to build content and community, doing so empowers our IP and brand operations. We have also run several brands marketing events to build brand awareness and drive user engagement. We partnered with [ Apollo Go ]. Autonomous driving platform to integrate our IPs with AI technology and the smart mobility. This partnership spans co-branding in vehicle order and use focused content campaign. In May, we participated in the first China new culture [indiscernible] Beijing. This is a nationalized level event co-hosted by 3 central ministry. Here Group was the only nonbased enterprise features in mere coverage. Including [indiscernible], our flagship IP, WAKUKU, was focused along that traditional culture activities as a new [indiscernible] acetic. Second, going forward, we will accelerate the creation of more offline scenarios to give IPs and user small business to interact. In Beijing, at Beijing Airport, we plan to set up a store to enhance brand visibility, and we are actively exploring more similar scenarios in Hong Kong. We plan to create a dedicated right experience on both at central peer using our IPs, building a unique brand stem. Operational discipline is reflected in our capital allocation. We continue to align results support and the cost structure with our strategic adjustments. Whether investing in IPs, opening stock or launching content initiative, we evaluate each potential investments against a clear ROI framework. We don't make guesses. We allocate capital based on information and data from IP momentum, our offline network, membership system and sales channels. Thank you for your continuing support. I will now turn over to Tim for a detailed review of our financial results. Thank you very much.

Thank you. Before I go into the details of our financial results, please note that all amounts are in RMB terms, that the reporting period is the third quarter of fiscal year 2026 ending on March 31, 2026, and that in addition to GAAP measures, we will also be discussing non-GAAP measures to provide greater clarity on the trends in our actual operations. We are pleased to report on our third quarter results, which exceeded expectations on both revenue and gross margin despite navigating a softer demand environment in the broader industry. Total revenue was RMB 164.7 million with gross profit of RMB 56.9 million, representing a gross margin of 34.5%, while revenue decreased from the previous quarter's RMB 177.3 million, gross margin improved by 350 basis points from 31%. These results reflect our ability to maintain operational resilience and financial discipline in a challenging market environment, while positioning the company for sustainable long-term growth through strategic cost management and continued focus on our core IP portfolio. Revenues for the quarter were RMB 164.7 million, primarily generated from sales of our 3 flagship IPs, WAKUKU, SIINONO and ZIYULI, compared to RMB 177.3 million in the previous quarter. This change was driven by the cadence of our new product launches and the impact of the Chinese New Year holidays during the quarter. which materially reduced effective working days and temporarily constrained our supply chain and delivery capabilities. Gross profit for the quarter was RMB 56.9 million compared to RMB 55 million in the previous quarter. Our gross margin increased to 34.5% this quarter from 31% in the previous quarter. This margin improvement reflects the early benefits of our strategic cost structure refinements implemented during this quarter, positioning us for enhanced margin performance going forward. On the operational front, total operating expenses were RMB 10.8 million for this quarter. To break this down, sales and marketing expenses were RMB 57.7 million. These expenses mainly included advertising and promotion expenses and staff compensation to support brand building and customer acquisition efforts across multiple platforms. As a percentage of total revenue, non-GAAP sales and marketing expenses, which exclude share-based compensation, changed to 35% this quarter from 29.6% in the previous quarter. Research and development expenses were RMB 9.5 million. These expenses mainly consisted of IP design and product development expenses. As a percentage of total revenue, non-GAAP research and development expenses, which exclude share-based compensation, changed to 5.7% this quarter compared to 5.1% in the previous quarter. General and administrative expenses were RMB 33.6 million. These expenses reflected our core operational functions, including employee compensation, professional service fees and other operational expenditures. As a percentage of total revenue, non-GAAP general and administrative expenses, which excludes share-based compensation, changed to 13.8% this quarter from 12.7% in the previous quarter. Our net loss was RMB 34.1 million compared to RMB 25.4 million in the previous quarter. Our adjusted net loss was RMB 22.9 million compared to $16.1 million in the previous quarter. Basic and diluted net loss per share were RMB 0.21 during this quarter. Basic and diluted adjusted net loss per share was RMB 0.15 14 during this year -- this quarter. Looking ahead, we remain excited about the growth prospects for our TOP TOY business. Based on current available information, including our pipeline for upcoming IP releases and seasonal demand, we expect revenues from our POP TOY business to be in the range of RMB 130 million to RMB 140 million for the fourth quarter of fiscal year 2026. We are revising our fiscal year 2026 revenue guidance to a range of RMB 600 million to RMB 610 million. This revision reflects near-term market realities and demonstrates our commitment to providing transparent guidance aligned with current industry conditions. That concludes my prepared remarks. Operator, let's open up the call for questions. Thank you.

[Operator Instructions] And today's first question comes from [ Jing Yuan ] at CICC.

[Foreign Language] Could management elaborate what changed in the consumer demand within the pop toy market have we seen in the past year? And how has the competition shifted?

Okay. Thank you. I'll take this question. First, we see that emotional consumption is really all about companion shape. Consumer motivation is driven by a mix of emotional value and collectible value and their expectations for IP products keep rising. So only products with real character and solid operations can truly connect with consumers. For young buyers, they are buying for immediate emotional satisfaction. Our handicraft world of WAKUKU series focuses on handcrafted feel, companion shape and warm heating. This responds directly to what consumers are looking for. This is a recent example for our new product launch for the IP WAKUKU. At the same time, good IP products have real artistic value. Some collectors still want to collect complete that or even buy on the secondary market because they love the IP. Companionship and portability have become very important product dimensions. The plush and bag charms saw strong growth in 2025 and became the fastest-growing category in the pop toy industry. However, starting in the first half of this year, we have seen the market cool down. The main reason is that supply chain grew too quickly, which reduced the early scarcity. This is actually a normal market correction. The industry is moving back to the core of emotional consumption from chasing guarantee to buying what you like, or the both. And for us, the underlying logic of this category has not changed. Consumers still want IP products that fit into their daily lives. We stick to our strategy, creating excellent IP products. For example, our recently launched SIINONO Mood On series, the new product, has been very popular based on recent consumer response. And for the competitive condition, the competitive landscape is shifting from driving territory to competing on ecosystem capabilities. Firstly, more players have entered the market, but only a few can operate IPs, especially the SaaS-owned IPs consistently over time. This is still a large market with many small players. And secondly, the core of competition is moving from product capability to full chain IP operation. Long-term IP value must be built based on -- from withing. Pop toys are not fast-moving consumer goods. You cannot drive growth simply by adding more SKUs. You should need IP design, supply chain, brand and sales, all working together as one system. And honestly, very few companies can actually put it altogether. Thirdly, the industry is taking a fresh look at owned IPs. For most pop toy companies, licensed IPs account for a majority of their revenue, and these licenses typically last only 1 to 3 years and has a high cost. So if a license doesn't get renewed, you are looking at a major hit to your revenue. We've taken a different approach. We have built a systematic capability to create and send our own IPs. Our IP portfolio is much more balanced. More than half of our IPs are self-owned. And even with our licensed IPs, we focus on long-term. [indiscernible] For co-branded IPs like XIAO AO, which is just recently launched, we used a deep cooperation co-creation model rather than relying on a simple licensing deal. That's all. Thank you.

Our next question today comes from Yichen Zhang with CITIC.

[Foreign Language] And my question is about the momentum of IPs. So far, we have several very successful IPs such as. So my question is, in the future, how to keep strength and the momentum of the popular IPs?

Okay. Thank you very much for your question. I will answer in Chinese, and my colleague will translate for me. [Foreign Language].

IP momentum depends on 2 factors: the Ips' characteristics and ongoing successful operations. To maintain this momentum, the key is to consistently deliver events, content, products and experiences that align with the Ips' characteristics and connect with our target audience.

[Foreign Language]

Specifically, here is what we are doing and will continue to refine in our IP operations strategy. First, we remain focused on our core IPs. We concentrate resources on our core IPs and build our IP portfolio around them. We need steady resources to keep our core IPs running smoothly. At the same time, we closely monitor performance across the multiple dimensions to improve resource efficiency.

[Foreign Language].

Second, we strengthened the user wellness and engagement through the high-quality products and experiences. This helps maintain and build IP momentum. We arranged product plans at a steady pace and keep innovating around IP. This year, we are planning next-generation products for our core IPs, along with offerings of new materials and new play style. We will expand into new categories at the right time. And beyond physical products, we are developing IP-driven experiences through a light asset model. For example, we recently signed a ferry at Hong Kong Center Pier, and we turn it into IP think on water.

[Foreign Language].

Third, we actively manage our IP brands through partnerships. This includes the placement in variety shows, celebrity partnerships and brand collaborations to grow our IP influence over time. Fourth, we're strengthening offline touch points through our DTC stores, ruble shops and dedicated branded sections in partner retail locations.

So overall, we believe strong fundamentals help us manage and extend IP life cycle. But this does not come from a single hit product. It comes from consistent, stable and systematic operations. Okay. That's all. Thank you.

And our next question comes from [ DC ] with [ Haiti Securities ].

[Foreign Language] My question is about our company's plan for the category expansion in the future.

[Foreign Language]

Yes, we do. We are continuously exploring the category expansion opportunities. Our principle is to extend from our IPs not to launch the new categories for their own sake. At this stage, we mainly consider where each IP is in its life cycle, then we carefully explain into merchandise around our core IP. Our strategy focuses on 3 key areas.

[Foreign Language]

First, merchandise is a key focus for us. We're gradually expanding into IP-related merchandise, particularly lifestyle products. The idea is to transform our IPs from collectibles on shelf into everyday companion in people's lives.

[Foreign Language]

Second, we're expanding a disciplined pace. There is a common trend in industry right now, many SKUs, very broad coverage, but that is not our approach. We believe category expansion was aligned with IPs' contact and user needs not to just add more SKUs. We prefer to go deep with our core IPs, not broad.

[Foreign Language]

Third, we are watching for opportunities with smart companionship and tech class as development. The combination of AI and pop toys pathways is becoming a new direction. We're actively researching it, but we're still exploring and don't have any specific plans yet.

[Foreign Language]

So to sum up, stay focused on IT, we go drive in our core categories, then gradually expand into merchandise. We are not trying to cover everything, instead our goal is to make sure every new category deals support the emotional connection between our IPs and our users. Thank you.

Thank you. As there are no further questions, I'd like to hand the conference back to management for closing remarks.

Please feel free to contact us or submit a request through our IR website. We look forward to speaking with everyone in our next call. Have a nice day.

Thank you. That concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.